Having achieved its financial targets ahead of schedule, Apollo Tyres is now focused on consolidating its domestic and international operations to transform into a truly integrated multinational corporation.
02 Oct 2024 | 113 Views | By Mayank Dhingra, Hormazd Sorabjee
Apollo Tyres Ltd, one of the few Indian companies that have successfully established a foothold in western markets, now finds itself at an inflection point. The tyre manufacturer recognizes that to evolve from an Indian company with global operations into a true multinational, it needs to now reassess some of ...
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Apollo Tyres Ltd, one of the few Indian companies that have successfully established a foothold in western markets, now finds itself at an inflection point. The tyre manufacturer recognizes that to evolve from an Indian company with global operations into a true multinational, it needs to now reassess some of its operational strategies and recalibrate its business approach. This has led to 'Apollo 2.0' – a 360-degree plan to make the company more agile and responsive across geographies and drive into a more profitable future.
From the bustling streets of Mumbai to the autobahns of Europe, Apollo Tyres has been steadily expanding its footprint. Now, fifteen years after acquiring the Dutch Vredestein Tyres, the company wants to shift up a gear and close the gap with long-established international players.
The first step, which began a quarter ago, is revamping the company’s organizational structure from one that is India-centric to a global organisation. That means integrating the operations of its five plants in India and two in Europe (Hungary and Netherlands) by making significant investments in IT and digital infrastructure. It is also aimed at enhancing productivity without major capital outlays, and finding a place among the top 3 most profitable tyre makers in the world within the next three to five years.
"We are aiming to become a more global company and we are very excited about Apollo 2.0,” says Neeraj Kanwar, Vice Chairman and Managing Director, Apollo Tyres, “While so far, we were operating in silos – Europe operating independently, and so was India and the US – we are trying to synergise all regional operations and get the best benefit out of the various territories we operate in.”
From a region-specific approach of having different presidents for Europe, India and Asia Pacific, the company has put in place global leadership for every major function – including manufacturing, sales and R&D – to achieve a more integrated execution structure. As an example, Chief Technology Officer Daniele Lorenzetti now oversees concurrent R&D at the company's technology centers in India and Holland.
Meanwhile, over the last five years, the company’s focus on costs and profitability have yielded concrete results, and several long-term targets have been met well before their FY26 deadline. For example, last year, the company achieved an EBITDA margin of 17%, above the target of 15%. Similar improvements are seen in ROCE or Return on Capital Employed – a financial ratio that measures a company's profits against the capital invested in it. The ROCE, which had fallen to single digits, rose to 16% last year, easily surpassing the target range of 12%-15%. Similarly, the company’s net debt fell to 60% of its EBITDA, well below the target of less than 200%.
Kanwar, in an extensive interview with Autocar Professional, explained the story behind the story – the factors that have contributed to this remarkable turnaround, and where the company is headed next.
Synergies & Technology
The company’s restructuring encompasses several areas: the core manufacturing operations – where AI and analytics are being deployed at scale; product development – where the focus is on cross-border collaboration; and innovation – where the company is substantially increasing its fund allocation.
On the manufacturing side, the company is relying on analytics and AI to realise optimisation and cost savings.
Over the last three years, the company has been investing heavily in building a digital backbone that enables it to identify black spots in the manufacturing process and take corrective actions. It has also set up two hubs – in Hyderabad and London – employing data scientists who pore over the copious amounts of data generated by the system.
The company’s digital tools connect every machine on the shop floor to the cloud to then take data from the servers and crunch them into actionable insights. The idea, says Kanwar, is to improve the manufacturing output without investing in capex, given the company’s goal of remaining ‘capex light’ for the next two years.
Hizmy Hassen, Chief Digital and Supply Chain Officer, Apollo Tyres, says the company is engaging with 25-30 startups at its digital innovation centre in Hyderabad's T-Hub and running "at least 5-6 proof-of-concepts at any given point" to solve productivity challenges through data analytics. The digital hub, along with Apollo Tyres' internal team, is also creating its own small language model – akin to its own ChatGPT – to assess and quickly respond to problems faced during manufacturing.
"We now have a rich pool of data sitting in the cloud which is feeding a lot of the work that is going on at Apollo Tyres in terms of AI," Hassen highlights, adding that Apollo Tyres is also offering services for commercial fleet operators, improving their operational efficiencies, by running analytics on their vehicle data.
According to Kanwar, the efforts have yielded a 10-15% productivity improvement in the last 12 months. "We are trying to get more tyres out of the same equipment using AI and ML. The CapEx, therefore, is going more towards AI and ML," he says.
There are other areas, besides manufacturing, where the company is trying to cut costs using better coordination, standardisation and synergies. One such is the company’s own technology budget.
Chief Technology Officer Daniele Lorenzetti points out that the company’s efforts are aimed at developing a common, global technology platform.
“This can then be deployed with unique modifications in different markets based on their boundary conditions…This leads to more cost optimisation and efficiency enhancement as we can extract the value of the money invested into the development of a new technology,” she notes.
In this direction, the tyremaker has already used an SAP system to bring its 16 regional and 140 local distribution centers and five factories in India on a common resource and inventory planning platform. Similarly, it has also implemented an e-commerce system for its distributors using which they can track and access not just their own inventory, but also that of the broader network.
Yet another area of focus is product development.
The company has two R&D centers, one in Chennai, and the other at Enschede in the Netherlands. Here, more than cutting costs, the focus is on supercharging the operations through concurrent engineering. The idea, points out the company, is to develop a common future technology backbone for tyre materials and design, which can then be modified to suit local requirements.
The increased focus on innovation is also visible in the resources allocated to R&D. These have gone up from 1% of sales five years ago to 2.5-3% today, despite the fact that revenue has also gone up during the period.
Kanwar says this strategy is guided by the belief that it is not enough to spend money on branding and marketing. “It is a very simple formula – the product must live up to the brand. If one gets these two right, the customer is certainly going to come," he points out.
Besides systems and processes, the company also has to synchronise another key aspect of its operations - people and cultures. "Managing people is the most challenging thing once you become a global organisation,” says Kanwar.
Instead of trying to say one culture is better than another, the focus is on developing a unique culture for the organisation or the “Apollo culture”, he explains. "It is in our DNA to be more passionate and committed, and our core values teach us to be there for each other…and that is what we are trying to inculcate in people around the world. We are getting there slowly."
The new focus on synergies has already started yielding results, says the MD: "We are already seeing a lot of interactions happening internally and much better product planning.”
Sustainability
The renewed focus on optimisation and waste reduction – while aimed primarily at improving the bottom line – also ties in with the company’s focus on improving its sustainability quotient. However, this is not as straightforward as it is for many other industries, given that the company’s key inputs – natural rubber, carbon black and power – leave considerable environmental impact during their production.
For now, the company is gearing up to ensure sustainable sourcing of its raw materials and establish a mechanism for their traceability as part of the European Union Deforestation Regulations (EUDR) norms that come into effect in January 2025.
"We are in an industry which could be considered non-sustainable given the kind of materials being used and the applications our products are put to,” points out President and Chief Business Officer Sunam Sarkar.
"We are aiming to look at adequate replacement of these downstream materials with those obtained from bio-fuels or are even considering alternate materials. The challenge, however, lies in the global availability of such materials."
On the energy front, the company is trying to turn to renewable sources. Its latest plant, commissioned in June 2020 in Andhra Pradesh's Chittoor district, relies solely on biofuels for its energy requirements. The company's 900-tonne-per-day Chennai plant depends heavily on the 10 MW solar power plant on the premises and another 24 MW contracted from solar farms near the Tamil Nadu-Andhra Pradesh border. The idea, says Sarkar, is to extend such practices to all the sites in India.
Path Ahead
The company has much to celebrate in terms of its financial and operational turnaround in the last five years. "Our balance sheet ratios slipped two years ago. We then shifted our focus on improving our returns,” Kanwar notes, adding that the company has gone from a ROCE of less than 10 to over-15 in the past two years.
However, Kanwar is not one to rest on his laurels. He is already creating the strategy for the next ten years, including plans for all three markets – India, Europe and the US. The aim, he points out, is to hit 18-20% in the coming years. Moreover, the company’s future capital expenditure will also be geared towards improving profitability, rather than merely attaining market share, he promises.
In the company’s two key markets – Europe and India – the focus will be on profitable growth, rather than expansion for the sake of expansion. "We are not just going for growth, but profitable growth. That is the key mantra for us," he says.
India & Europe
The company is manufacturing both Apollo and Vredestein tyres across its plants in India as well as Europe. In India, Apollo remains a premium offering among its Indian peers such as JK Tyre and Ceat. Vredestein was launched in India in 2021, positioned as a premium brand to rival products from global players like Bridgestone, Yokohama, and Goodyear that were already present in the domestic market.
For now, the dual-brand strategy – Apollo for the mainstream and Vredestein for premium cars and motorcycles – will continue. "We are not going to think of a third brand at all. Even between Apollo and Vredestein, Apollo is going to remain the sole offering in the truck segment in India," Kanwar says.
Kanwar believes that the dual-brand strategy is yet to be exploited to the full extent. "It requires a huge mindset change to undertake this dual-brand strategy. So far, we were not extracting the best out of this strategy. But, with Apollo 2.0, there is a huge focus to get it right," he notes.
In India, the company will continue to bet on the ongoing SUV trend that is driving demand for larger tyre sizes. "SUVs are booming and giving a fillip to 15-inch-and-above tyre sizes. The higher you go, the better the margins," Kanwar explains.
"We are doing a lot of new product development where we are trying different recipes to see how we can get the best product costing to increase our margins. Even in the truck-and-bus-radial (TBR) segment where Apollo Tyres is the leader in the Indian aftermarket, we are doing a lot of innovation to improve our margins," he notes.
While large tyre sizes are going to be key drivers of the company's future growth in India, Apollo Tyres will continue to cater to the market with passenger car radials (PCRs) starting from the 12-inch segment, with notable demand anticipated from rural areas of India. "While the maximum growth will come from the 15-inch-and-above category, we will have to stay in the 12-inch segment as well as far as rural markets are concerned," according to Kanwar.
However, despite orchestrating a strategy to widen its global footprint and achieve strong and sustainable profitable growth, Apollo Tyres does not aim for the top spot in the PCR segment when it comes to global standings. "When it comes to passenger cars, players like Michelin have been there for over 150 years, and are very well entrenched in the market," Kanwar says.
"Having said that, we will target niche categories and try to move to the Tier-1 segment. For instance, Vredestein is a Tier-1 brand in Europe in the agricultural segment," he notes.
The company is also considering the ultra-high-performance tyre segment, where, while it has the product technology for more mature markets, it does not enjoy the brand value commanded by other established global giants. "We are offering high-performance tyres at a price which gives more value to the customer. That is what we are doing," Kanwar points out.
When it comes to India, Apollo Tyres is well positioned, both in terms of volumes and price points. The Apollo brand enjoys a Tier-1 reputation, albeit marginally below some global majors. However, the company also sells more volumes across the passenger vehicle, commercial vehicle, and two-wheeler segments, compared to its chief competitors. Additionally, it has strengthened its arsenal by positioning Vredestein to compete against these foreign tyre brands in the Indian market.
"While we are not going after revenues, we are not going to lose market share either. We will keep up with our market share and go after profit. We will keep looking for niche areas such as more profitable distribution channels," says Kanwar.
Even as the company explores other markets, it remains committed to India. “We are quite bullish about India's growth potential over the next 15-20 years, and with rapidly developing infrastructure that would enable more movement of vehicles across the country, it will all boil down to the tyres. We will keep growing in the country and I am very bullish about India," opines Kanwar.
Branching Out
Besides India and Europe, the company is also betting big on other global markets, such as the US and the Middle East. "While Europe is better than America in terms of profit margins, the US has a lot more potential. We introduced truck tyres under the Apollo brand in the US a year ago, and are selling Vredestein in car tyres," Kanwar points out.
The company has hired local people in Atlanta and sent expats from both India and Europe to build up its operations in its newest market.
“We are building the brand slowly. We are playing it the right way, and want to build a distribution in America just like we have built in Europe and India. Eventually, four-five years down the line, we see America becoming a whole market for us," he reveals.
With strong economic projections, the company also anticipates future growth coming from the Middle East and African markets, albeit at a rate lesser than that from the US.
As Apollo Tyres rolls out its ambitious 2.0 strategy, the company finds itself at a crucial crossroads. With the road ahead paved with challenges - from intense global competition to the imperative of sustainable manufacturing - the company’s technological prowess and market acumen will be put to the test. For Apollo Tyres, however, true success will lie in whether it is able to reinvent itself and navigate the complex terrain of the global business landscape.